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France Drops Growth Outlook, Will Miss Deficit Target

2014 Growth Now Seen at 0.4%

PARIS—France lowered its growth forecast again and warned it would need more time to bring its public deficit in line with European Union rules, as the eurozone's second-largest economy remains mired in stagnation and low inflation.

Finance Minister
Michel Sapin
said the French economy would grow just 0.4% in 2014, compared with the 0.5% growth forecast issued only a few weeks ago. In 2015, France's economy will grow 1%, versus the government's previous forecast of 1.7%, he said on Wednesday.

France will also have to push back its plans to get its budget deficit within 3% of economic output by another two years to 2017, he said, the latest sign of the economic challenges the French government faces.

Instead, Mr. Sapin projected France's public deficit would stand at 4.4% of gross domestic product in 2014, rather than falling to 3.8%, as the government had previously projected. Spending cuts in 2015 should help the government cut the public deficit to 4.3% next year, and below 3% in 2017, he said.

France has already negotiated a two-year delay to 2015 from 2013 to get the budget deficit within the EU's 3% target. Mr. Sapin's comments suggested the government would seek authorization for a further delay, but negotiations with Brussels and France's EU partners, particularly Germany, the eurozone's biggest proponent of austerity, are likely to be difficult.

"We are not asking for any change in European rules, we are not asking for any suspension, or for any exception to be made for France or any country," said Mr. Sapin. "We are asking for everyone to take into account the economic reality, growth that is too weak and inflation that is too low."

Speaking to Germany's lower house of parliament on Wednesday, though, Chancellor
Angela Merkel
called on the eurozone to stick to fiscal discipline.

"We should take it very seriously when the European Commission has rightly pointed out that scaling back reform efforts is the biggest risk to the further recovery," she said, without singling out any country in the currency bloc.

"That's why the commission is right in keeping up pressure to achieving solid budgets and implementing reforms," she added, "The German government supports the commission in this."

French President
François Hollande's
government is struggling to find ways to boost the economy, which failed to register any growth throughout the first half of the year. It has pledged a number of measures to revive the construction sector and is considering loosening rules that govern stores' business hours on Sunday. The government is also trying to push ahead with other measures aimed at restricting monopolies in the pharmaceutical industry and other sectors.

Economists are skeptical that the policies will be enough. Mr. Hollande, halfway through his term, has failed to deliver on his key campaign pledge to arrest the rise of unemployment in France. High taxes and uncertainty over government policies have weighed on corporate investment.

The government has sought to adopt a more pro-business image, but Mr. Hollande's responsibility pact with companies—announced with much fanfare in January—has failed to deliver tangible results.

Mr. Sapin said the government wouldn't raise taxes further and would seek to address its fiscal challenges by continuing to cut spending. "We need to find the right pace to reduce the deficit while preserving growth," he said.

Mr. Sapin said that the government would stick to its promise to cut €50 billion ($65 billion) from France's big public spending bill over the next three years. Despite signals last week by the government that it may ease planned cost-cutting measures, France will stick to its target of €21 billion in spending cuts in 2015, said Mr. Sapin.

The plans to cut spending are likely to continue to generate discord among the leftist fringes of Mr. Hollande's Socialist Party.

After a drubbing at the polls in local elections in March, Mr. Hollande shuffled his government, appointing Manuel Valls prime minister and handing him the responsibility for marshaling the new pro-business platform.

But as the economy stagnated, opponents grew in strength. Around 40 Socialist lawmakers abstained from voting on a program of public spending cuts to fund the business tax cuts in the coming years. Late last month, the French president again shuffled his cabinet, casting aside ministers who had accused Mr. Hollande of inflicting damaging austerity on the French economy.

Dissident lawmakers will have another opportunity to show their resolve on Sep 16, when Mr. Valls faces a confidence vote in Parliament. The government is set to detail its budget for 2015 on Oct. 1.